To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shenzhen XFH TechnologyLtd (SZSE:300890) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shenzhen XFH TechnologyLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.085 = CN¥197m ÷ (CN¥3.9b - CN¥1.6b) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen XFH TechnologyLtd has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.3%.

Check out our latest analysis for Shenzhen XFH TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen XFH TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Shenzhen XFH TechnologyLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Shenzhen XFH TechnologyLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 8.5% and the business has deployed 269% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Shenzhen XFH TechnologyLtd's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Long story short, while Shenzhen XFH TechnologyLtd has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last three years. Therefore based on the analysis done in this article, we don't think Shenzhen XFH TechnologyLtd has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Shenzhen XFH TechnologyLtd and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.